Although India has the potential for enormous wind power growth, financing challenges may make renewable energy more expensive there than in the U.S. and Europe, and could limit future growth in the sector, finds a new report released by the Climate Policy Initiative (CPI) and the Centre for Emerging Markets Solutions (CEMS) at the Indian School of Business (ISB).

According to the organizations, relatively short-term loans, combined with high interest rates, increase the cost of renewable energy in India by 24% to 32% compared to the costs for similar projects in the U.S. and Europe.

Even if the cost of debt goes down, issues with loan terms, access to low-cost equity, limits on foreign debt and national banking practices are likely to present additional barriers for growth in India's renewable energy sector in the medium and long term, according to the report.

In 2011, India launched Renewable Energy Credits, a market-based national policy designed to help the country reach its renewable energy targets, which are 4 GW to 10 GW of renewably energy by 2017 and 20 GW by 2022.

Although the design of the Renewable Energy Certificate mechanism appears adequate, the performance of the market has been far from satisfactory, the report says.

"High debt costs, common in emerging economies, are a potential barrier to the growth of renewable energy," says David Nelson, senior director at CPI. "CPI is now analyzing how other nations have addressed this issue. Brazil's national development bank has provided low-cost debt to spur these projects forward and may provide some helpful lessons for India."

"India has more than enough wind and solar potential to meet the country's ambitious targets," adds Reuben Abraham, executive director of CEMS at ISB. "But without policy solutions, India's financing challenges will force this sector to fall behind."